Granholm's Dilemma

When it comes to fiscal problems, Michigan is in a league of its own.

Michigan's Jennifer Granholm did a lot better than her neighbor Mitch Daniels in 2006--she got reelected governor despite the state's worsening economic situation, and her party took control of the state House after more than a decade in the minority. But her second term isn't going to be an easy one. As she prepares to unveil her new budget this month, Granholm has to grapple with a deficit for the current fiscal year in the $500 million range, along with much larger shortfalls predicted for the year ahead. If that weren't trouble enough, the governor also will have to find a substitute for nearly $2 billion in tax money that the legislature has voted to stop collecting.

Michigan's Single Business Tax, so called because it replaced myriad old levies on intangibles, inventory and various commercial transactions, had grown unwieldy--and very unpopular--in the 30 years since its creation. For one thing, it was imposed regardless of whether a business showed profit. "It had an aura of unfairness, of complexity and discouragement of enterprise," says Craig Ruff, of the Lansing-based Public Sector Consultants.

When an initiative was put forward last year to eliminate the tax, the legislature voted to phase it out by the end of 2007. Granholm introduced a new business-tax proposal last fall, but legislators yawned. Now they're going to have to get serious.

There's nothing close to a consensus on what should be done, however. Business groups are arguing that economically stagnant Michigan needs to be thinking about tax relief, not increases. Republicans, who still control the state Senate, tend to agree.

On the other side of the debate are advocates for public programs who argue that after years of budget reduction, government services have been cut not just to the bone but to the marrow. After accounting for inflation, the state is spending only a little more than two-thirds the amount it spent a decade ago. And any further cuts will have to be made in the context of negotiated increases in state salaries and benefits and rising costs for Medicaid and school aid that will add another half-billion in expenditures for the coming year.

In short, while other states are opening their budget seasons with the first flush treasuries in several years, Michigan will be consumed with pain over taxes and budget to the point of crowding out all other issues. In the end, though, something will have to be done. "The sheer weight and significance of the crisis means it's going to get solved," says Ruff. "It's when you nitpick on the edges of an issue that politicians can feud and delay and compromise. In this case, they face calamity."